Originally published: 14 October 2023 | Updated: 22 September 2026
PAYG instalments can catch business owners by surprise, particularly after a profitable year.
Pay as you go (PAYG) instalments are regular prepayments towards the expected tax on your business and investment income. Instead of waiting until your annual tax return to pay the full amount, the PAYG instalment system spreads payments across the year.
For many businesses, that can make tax obligations easier to plan for. However, the amount you pay depends on the method available to you, the information the ATO holds and whether your current results are similar to the income reported in your most recent tax return.
Understanding how PAYG instalments work can help you avoid confusing them with PAYG withholding, identify when an instalment may need to be reviewed and build upcoming tax payments into your cash flow.
Quick Summary
- PAYG instalments are prepayments towards expected income tax on business and investment income.
- The ATO may automatically enter you into the PAYG instalment system based on information in your latest tax return.
- Eligible taxpayers may be able to choose between the instalment amount method and instalment rate method.
- The amount method uses an amount calculated by the ATO from information in your latest tax return.
- The rate method applies an ATO-provided instalment rate to your actual instalment income for the period.
- The rate method can suit businesses whose income changes significantly during the year.
- The amount method can be simpler for businesses with relatively consistent income.
- PAYG instalments are credited against your final income tax liability when your tax return is assessed.
- You can vary an instalment if the amount or rate is likely to result in paying too much or too little during the year, but inaccurate variations can have consequences.
- For 2026-27, the GDP adjustment factor used for quarterly PAYG instalment amounts is 5%.
- Proposed dynamic and optional monthly PAYG instalment changes from 1 July 2027 are not yet law as at 22 September 2026.
What Are PAYG Instalments?
PAYG instalments are regular payments towards the expected income tax on business and investment income.
They are not an additional tax. The amounts you pay during the year are credited against your income tax liability when your tax return is assessed.
If your instalments are more than your final tax liability, the excess is taken into account in your assessment. If your instalments are less than the final liability, you may have a remaining amount to pay.
The purpose of the system is to reduce the chance of a large income tax bill arriving all at once after the end of the financial year.
Who Has to Pay PAYG Instalments?
The ATO can automatically enter taxpayers into the PAYG instalment system based on information reported in their latest tax return.
For individuals, the ATO’s current guidance says automatic entry generally applies when all of the relevant thresholds are met, including instalment income of $4,000 or more, tax payable on the latest notice of assessment of $1,000 or more, and estimated notional tax of $500 or more.
Businesses and investors can also voluntarily enter the PAYG instalment system where they expect to earn business and investment income over the relevant threshold.
If the ATO enters you into PAYG instalments, it will notify you and explain what you need to do. The exact reporting and payment arrangements depend on your circumstances.
PAYG Instalments vs PAYG Withholding: What Is the Difference?
PAYG instalments and PAYG withholding are different parts of the tax system.
PAYG instalments are prepayments towards income tax on business and investment income.
PAYG withholding generally involves amounts withheld from payments such as salary and wages and sent to the ATO on behalf of the recipient.
A business can therefore have PAYG instalment obligations and PAYG withholding obligations at the same time.
This distinction is important when reviewing a BAS because both obligations can appear on activity statements, but they relate to different tax responsibilities.
How Are PAYG Instalments Calculated?
There are two main methods for calculating PAYG instalments:
- Option 1: instalment amount
- Option 2: instalment rate
If you are eligible to choose between the methods, both options will generally appear on your activity statement or instalment notice.
Once you choose an option, you generally continue using that method for the rest of the financial year. If you want to change methods, you can generally do so on the first activity statement of the next financial year.
Option 1: PAYG Instalment Amount Method
Under the instalment amount method, the ATO calculates the amount for you.
The amount is based on information from your most recently lodged tax return. You generally pay the amount shown on your activity statement or instalment notice unless you choose to vary it.
This is the simpler of the two methods because you do not need to calculate instalment income for each period.
When can the amount method make sense?
The amount method can be practical where business or investment income is relatively stable and the ATO-calculated amount remains reasonably aligned with current performance.
For example, a plumbing business with fairly consistent income across the year may prefer the simplicity of paying the amount shown by the ATO rather than calculating instalment income every quarter.
Why can the ATO amount change?
The ATO reassesses PAYG instalments after a tax return is lodged. If the latest return shows higher or lower business and investment income, the instalment amount can change.
The ATO can also apply a GDP adjustment to quarterly instalment amounts. For the 2026-27 income year, the GDP adjustment factor is 5%.
That means an instalment amount may increase even when the business has not manually changed it. If current-year performance differs materially from the information used by the ATO, it may be worth reviewing whether the instalment remains appropriate.
Option 2: PAYG Instalment Rate Method
Under the instalment rate method, the ATO provides an instalment rate and you apply that rate to your instalment income for the period.
In simple terms, the payment changes as the relevant income changes.
This can make the rate method useful for businesses with seasonal, irregular or rapidly changing income because the instalment can move more closely with current trading conditions.
Example: a seasonal business
Consider a DJ whose busiest trading period runs from November to January.
Using the rate method means the PAYG instalment can rise during high-income periods and fall when instalment income is lower. That can be more closely aligned with the way a seasonal business actually earns revenue.
The business still needs accurate figures for each reporting period because the instalment is calculated using current instalment income and the rate provided by the ATO.
Amount Method vs Rate Method: Which Is Better?
Neither method is automatically better for every business.
| Consideration | Instalment amount | Instalment rate |
| Calculation | ATO calculates the amount | You apply the ATO rate to instalment income |
| Administration | Generally simpler | Requires current instalment income each period |
| Income pattern | Can suit relatively consistent income | Can suit variable or seasonal income |
| Cash-flow alignment | Based largely on prior tax information | Moves with current instalment income |
| Variation | Can be varied where appropriate | Can be varied where appropriate |
The options available to you are determined by the PAYG instalment rules and what appears on your activity statement. If both methods are available, the choice should reflect how your business earns income, how much administration you want to manage and whether prior-year results are a useful guide to the current year.
Where Do PAYG Instalments Appear?
PAYG instalments can appear on a business activity statement (BAS) or an instalment notice.
For businesses already lodging a BAS for GST or other obligations, PAYG instalments may form part of that same reporting process.
If you want a broader explanation of the reporting process, see Cotchy’s BAS guide for an overview of business activity statements.
PAYG instalment due dates are generally 28 days after the end of each quarter, although the exact due date and reporting cycle shown by the ATO should always be checked for your circumstances.
Can You Vary PAYG Instalments?
Yes. If you believe the ATO-calculated amount or rate will result in paying significantly more or less than your expected tax for the year, you can generally vary your PAYG instalment.
A variation does not change your final income tax liability. It changes how much you prepay during the year.
This can be useful when business conditions have changed substantially. Examples might include a significant fall or rise in income, major changes to deductible expenses or a business that has stopped or reduced trading.
However, a variation should be based on a reasonable estimate. However, a variation should be based on a reasonable estimate. If your varied instalments are less than 85% of the tax ultimately payable on your business and investment income, the ATO may impose general interest charge on the difference.
When Should You Review a PAYG Instalment?
A PAYG instalment is worth reviewing when the assumptions behind it no longer resemble the business you are currently operating.
- Revenue has increased or decreased significantly.
- The business has become much more seasonal.
- Margins or deductible expenses have materially changed.
- A major contract has started or ended.
- The business has stopped trading or substantially reduced operations.
- Your latest lodged tax return reflects a very different year from current trading.
- The ATO-calculated instalment is creating a cash-flow problem and you believe it does not reflect expected tax for the year.
A cash-flow problem alone does not automatically mean the tax estimate is wrong. Before varying, the expected annual tax position should be reviewed.
How PAYG Instalments Affect Business Cash Flow
PAYG instalments are a tax obligation, but they are also a cash-flow planning issue.
A profitable business can still run into difficulty if upcoming tax payments have not been allowed for in cash-flow forecasts. The money sitting in the bank is not necessarily all available for operating costs, hiring, equipment or owner drawings.
Regular bookkeeping and current financial reporting make it easier to see whether upcoming PAYG instalments are supported by current business performance.
This is also why accurate business record keeping matters. Reliable records make it easier to review current income, deductions and tax obligations before an instalment is varied.
For businesses that need broader support with BAS, income tax and ongoing tax obligations, Cotchy’s taxation services bring those obligations together with the underlying accounting records.
What Happens to PAYG Instalments at Tax Time?
PAYG instalments are reconciled when the relevant income tax return is assessed.
The instalments paid during the year are credited against the final income tax liability.
If too much has been prepaid, that excess is taken into account in the assessment. If too little has been prepaid, there may be a remaining tax amount to pay.
This is why PAYG instalments should be viewed as tax prepayments rather than a separate tax expense.
Can You Stop PAYG Instalments?
If you are no longer earning business or investment income, you may be able to exit the PAYG instalment system.
Do not simply ignore an activity statement or instalment notice because your circumstances have changed. Check the ATO process or speak with your registered tax agent so the obligation is dealt with correctly.
What Is Changing With PAYG Instalments From 1 July 2027?
The Australian Government announced proposed changes intended to make PAYG instalments more responsive to current business conditions.
The proposal includes dynamic PAYG instalment calculations using current accounting software data and an option for businesses to report and pay PAYG instalments monthly from 1 July 2027.
As at 22 September 2026, the ATO states that the ability for businesses to choose monthly PAYG instalments is not yet law.
Businesses should therefore continue following their current PAYG instalment obligations unless and until the proposed changes are legislated and apply to them.
Cotchy has also discussed this proposal in its 2026-27 Federal Budget guide. Because the measure is still proposed, the evergreen PAYG guide should be reviewed again if the law changes before 1 July 2027.
Common PAYG Instalment Mistakes
- Confusing PAYG instalments with PAYG withholding.
- Assuming the ATO-calculated amount must reflect current-year trading conditions.
- Varying an instalment without first estimating the expected annual tax position.
- Treating a variation as a reduction in final tax rather than a change to tax prepayments.
- Ignoring PAYG instalment notices because the business has changed.
- Failing to allow for PAYG instalments in cash-flow planning.
- Using outdated financial records when deciding whether an instalment is too high or too low.
PAYG Instalment Checklist for Business Owners
- Check whether the ATO has entered you into PAYG instalments.
- Confirm whether your activity statement offers the amount method, rate method or both.
- Understand which method you are currently using.
- Check the due date shown on your BAS or instalment notice.
- Compare the ATO calculation with current business performance.
- Review your expected annual tax position before varying an instalment.
- Keep bookkeeping and financial records current.
- Build PAYG instalments into cash-flow forecasts.
- Remember that instalments are credited against final income tax.
- Review future 1 July 2027 changes once the final law and ATO implementation are confirmed.
Frequently Asked Questions
What are PAYG instalments?
PAYG instalments are regular prepayments towards the expected income tax on business and investment income. They are credited against your final income tax liability when your tax return is assessed.
Are PAYG instalments an extra tax?
No. PAYG instalments are prepayments towards your expected income tax rather than a separate additional tax.
What is the difference between PAYG instalments and PAYG withholding?
PAYG instalments relate to expected tax on business and investment income. PAYG withholding generally involves tax withheld from payments such as salary and wages and remitted to the ATO.
How does the PAYG instalment amount method work?
The ATO calculates an instalment amount using information from your most recently lodged tax return. You generally pay the amount shown unless you vary it.
How does the PAYG instalment rate method work?
The ATO provides an instalment rate. You apply that rate to your instalment income for the reporting period to calculate the PAYG instalment.
Which PAYG instalment method is better for seasonal businesses?
Where both methods are available, the rate method can align more closely with changing income because the payment is calculated using instalment income for the period. The appropriate method still depends on the business and the options offered by the ATO.
Can I change PAYG instalment methods during the year?
If you choose between the amount and rate methods, you generally continue using that option for the rest of the financial year. A change can generally be made on the first activity statement of the next financial year.
Can I vary a PAYG instalment?
Yes. You can generally vary an instalment amount or rate where it is expected to result in paying too much or too little during the year. Variations should be based on a reasonable estimate because underestimating can have consequences.
What is the PAYG GDP adjustment for 2026-27?
The GDP adjustment factor used for quarterly GST and PAYG instalment amounts is 5% for the 2026-27 income year.
Are monthly PAYG instalments available from 1 July 2027?
Monthly and dynamic PAYG instalment changes have been proposed for 1 July 2027. As at 22 September 2026, the ATO states that the optional monthly reporting measure is not yet law.
Keep PAYG Instalments Connected to Your Current Numbers
PAYG instalments are easier to manage when your bookkeeping, tax planning and cash-flow information are current.
The amount shown by the ATO is based on tax information already lodged, while your business may have changed since that return was prepared. Reviewing the instalment against current performance can help identify when the existing calculation deserves a closer look.
Cotchy provides accounting, bookkeeping, BAS and taxation support for Australian businesses. If you are unsure why your PAYG instalment has changed or whether a variation is appropriate, our tax team can review the figures and the underlying tax position with you.
